Warren Buffett Is Betting Big on IBM Stock
International Business Machines Corporation (NYSE:IBM) stock has been in a slump lately and investors are starting to get nervous. But if the actions of Warren Buffett are any indication, shareholders don’t have much to worry about.
The legendary billionaire investor is known for making solid investments, if nothing else, so when he picks a solid contrarian play, wise investors take notice. Despite IBM’s poor performance in the third quarter of 2015, Warren Buffett has added more shares to his position in IBM stock. (Source: “What Warren Buffett Sees In IBM, Others Are Missing,” Forbes, November 17, 2015.)
But why would he do such a thing?
Warren Buffett Bets Big on IBM Stock
Buffett’s company, Berkshire Hathaway Inc., added about two percent to its holdings in IBM during the third quarter. (Source: “Form 13F,” United States Securities and Exchange Commission, last accessed November 23, 2015.) This follows a steady increase in the volume of IBM shares held by Buffett’s company over the last four years.
At its original disclosure of ownership of IBM stock back in 2011, Berkshire Hathaway held a 5.5% stake in the company. This was equivalent to roughly $10.7 billion worth of shares. However, a great deal of events have transpired since then, both positive and negative, and many analysts believe IBM is no longer the great stock pick it may have once been. IBM’s stock has plummeted, as the tech company has been battered by its transition into the cloud computing business. Just as IBM’s business model has been under constant pressure in the last several years, this has been especially true for its stock price.
Meanwhile, as IBM’s stock value has declined, as mentioned, Warren Buffett has steadily ramped up his purchases of IBM stock over the years since his initial investment. In fact, Berkshire Hathaway now owns approximately 8.3% of IBM’s outstanding shares as a result of a combination of the aforesaid purchases and IBM’s own share-repurchasing program. (Source: “What Warren Buffett Sees In IBM, Others Are Missing,” Forbes, November 17, 2015.)
Why would a man famed for making the most lucrative investments be going after a stock that apparently few others do?
It’s simple: Warren Buffett is going for the contrarian play, and he’s not afraid to bet big.
You see, Buffett has always held a more long-term view of his investment portfolio, but he also has the successful track record to prove his approach is correct. So what’s so special about IBM, then?
IBM is slowly making the transition from its core business model, which is in a decline, to the aforementioned one, which is focused on cloud computing services. (Source: “Warren Buffett’s Berkshire Hathaway Ups Stake in IBM and GM, Cuts Walmart,” Fortune, November 16, 2015.) In the meantime, its stock price has suffered mightily as markets and analysts alike have reacted to its aging model, which is beginning to show more and more cracks. When you take into account the huge upside potential stemming from the company’s emerging business strategy, however, it soon becomes clear that IBM is likely trading at a significant discount while it transitions to a new strategy.
That’s right. IBM stock is, in fact, undervalued, which is why smart investors like Warren Buffett are moving now to reap huge gains when the stock eventually rebounds. But don’t take my word for it; a cursory look at the numbers proves my theory correct.
Would you be surprised to know that IBM’s yield is sitting at a very attractive 3.9%? This is well above the S&P 500’s average yield of just two percent. If you needed any more convincing, IBM also has a solid track record of showing an average annual dividend growth rate of 15% over the past five years. While this is in no way guaranteed, it doesn’t take an MBA to figure out how a 3.9% yield grows quickly at a 15% annualized rate.
The Bottom Line on the IBM Stock price
If you’re inclined to study market giants’ behavior when it comes to finding good leads on your contrarian stock picks, then there is simply no one better than Warren Buffet from whom to get your cues. The reality of this style of investment is that if you’re looking for the big gains, you need to accept the risk of going against the grain.
While others might disparage IBM as an investment right now, those investors who are savvy enough to hold onto it in the long-term sense are likely to reap huge gains when the stock eventually recovers in value.